US home prices are rising twice as fast as inflation

Last week, the latest numbers from the S&P/Case-Shiller
index showed continued significant home price growth in most of
the 20 cities within the survey. The cities with the most growth
were found in the Western US and, to a lesser extent, the South:

"Home prices continue to rise twice as fast as inflation, but the
pace is easing off in the most recent numbers," David M. Blitzer,
chairman of the Index Committee at S&P Dow Jones Indices,
said in a statement. "The year-over-year figures for the 10-city
and 20-city composites both slowed, and 13 of the 20 cities saw
slower year-over-year numbers compared to last month."

While numbers have moderated over the past year, many cities
continue to see sizable growth:

Mises
Institute

Part of this dichotomy between the West and north is due to
larger demographic trends, as discussed in this article. More people are moving west
and south.

But the growth seen here is also due to the fact that the US is
still in the boom part of the business cycle. Credit is still
easy to come by for those with income. And job growth,
though very anemic (see here) remains stable.

If we take this all together, we can start to see how the boom in
home prices is different than the last one. Job growth and wage
growth is weaker (where there is real growth at all), and housing
production is much lower than it was during the last cycle.

In other words, while we may be in a boom phase, this one is
weaker than the last one.

In fact, looking at home price growth according to this index, we
find year-over-year growth rates in this cycle have never matched
where they were in 2005 and 2006. I've also compared the C-S
index growth to year-over-year growth in the CPI to get a better
sense of real home price growth:

Mises
Institute

Here we can identify a few different periods. During the first
half of the 1990s, home price growth according to this measure
was more or less flat. It was only after 1997 that we really
began to see the growth we have later associated with the dot-com
boom.

That boom was never allowed to collapse, though, thanks to
massive monetary and fiscal stimulus in the early Bush years
which led to the bubble years of the mid-2000s. After that, home
prices came in well below the official inflation rate. Again,
after 2012, home prices came roaring back following both fiscal
stimulus (remember all those first-time home buyer programs 5
years ago?) and monetary stimulus with the target Federal Funds
Rate at record low levels.

Since 2012, though, thanks to both a deflationary economy and a
lack of any additional room for action on the part of the Fed,
home price growth nationwide has dipped well below even the peak
of this current cycle. Most cities are now in the 3-percent to
6-percent range.

Given that the official inflation rate is coming in around one-
to two-percent growth, the CPI isn't realistically accounting for
the realities of true essentials — i.e., not iPads — such as housing prices, especially
with rents outpacing home prices in many markets. Housing
is the largest single living expense for most households, so six
percent growth is a real challenge for households facing flat
wages.

Needless to say, many prospective first-time home buyers in
places like Portland and Seattle can pretty much forget about
home purchases if current trends continue, and unless wage growth
picks up significantly. Wage growth is indeed relatively good in
the much of the US, but few are seeing ten-percent growth in real
income, year over year.

And speaking of income, how does it compare to home price growth?

Using the Census Bureau's single-year income estimates, I've
compared income growth to the Case-Shiller growth (income is
measured in current dollars):

Mises
Institute

As one might expect, home price growth thoroughly outpaced
wages from 2000 to 2005, although thanks in part to sticky
wages and part time work, income growth did not fall like home
prices fell from 2007 to 2012. But, for the past three years
available (income numbers are as of March of the year listed),
home prices have been outpacing income growth yet again.

For people who bought a home in 2000 (in the right
neighborhood) and have bought and sold at the right times, this
will not be a problem. However, household formation has
continued unabated, so new households today looking to save
money before buying a home will not be well-rewarded. With the
Fed's war on saving, and low-risk investments (like savings
accounts) paying at well under one percent, saving money the
old-fashioned way is a rather useless endeavor. So, instead,
we've replaced saving with consumer debt (i.e., mortgages) and
a hope that people can continue to make the high payments every
month. It's not a terribly wise long-term economic strategy,
but it's one the Fed is banking on.

Note: The views expressed on Mises.org are not
necessarily those of the Mises Institute.